Portfolio Review

2/20/2012


Two new Buys

Jabil Circuit ($25; JBL) is being added as a Buy. The company provides electronics-manufacturing services that help clients procure components, automate assembly, and test products. Jabil's biggest customer is the reeling Research In Motion ($15; RIMM), accounting for 15% of annual revenue in fiscal 2011 ended August. But management has hinted that Jabil is winning business with Apple ($509; AAPL), which reportedly now accounts for more than 10% of sales.

Despite superior operating momentum and a price gain of 28% so far this year, the shares still trade at less than 11 times trailing earnings, 42% below the median electronics-manufacturing-services stock in the S&P 1500 Index. The consensus projects per-share-profit growth of 9% in the fiscal year ending August and 13% in fiscal 2013, targets that should prove conservative if the global economy continues to improve. 


EMC ($26; EMC), a maker of data-storage products and software, is riding high on the deluge of digital data and proliferation of data centers. Operating cash flow, up 44% in the December quarter, has advanced in seven of the last eight quarters. That momentum suggests EMC is gaining share in the storage market. Rising analyst estimates call for 14% higher per-share earnings this year.

The stock has rallied 23% this year and now trades in line with the median technology stock in the S&P 1500 Index. But the shares look cheap relative to historical norms at 17 times trailing earnings, 28% below the three-year average. EMC scores at least 50 for all six Quadrix category ranks and earns an Overall score of 92. The stock is being added to the Buy and Long-Term Buy lists.

Oracle, Google off Buy List

Oracle ($28; ORCL) had managed six consecutive quarters of double-digit sales growth and per-share-profit growth of at least 26% before falling short of the consensus in the November quarter. The company blamed the weak sales on an inability to close deals, saying demand for its products remains robust. It is difficult to assess whether the company is correct, or whether corporations' fiscal conservatism is driving them toward cheaper, piecemeal solutions rather than Oracle's full-service products. However, Oracle's failure to regain the ground lost after its earnings announcement suggests Wall Street's confidence has eroded somewhat.

Consensus expectations for profit growth of 6% in the fiscal year ending May and 10% in fiscal 2013 may prove conservative. However, after rising 10% so far this year, Oracle trades roughly in line with its peers. The stock does not seem likely to outperform its industry in the year ahead, and we are dropping it from the Buy List. But the industry leader's potential to outperform expectations over the next two to three years warrants the retention of its Long-Term Buy rating.


Google's ($610; GOOG) Quadrix Overall score has slid to 72 — down from 96 at the start of the year and its lowest level since early May. A disappointing December quarter is partly to blame, as per-share profits rose just 9% and missed the consensus by $0.99.

Google, which generates almost all of its sales from online ads, is aggressively seeking to squeeze revenue from new and unproven sources, such as streaming video, online shopping, and the Google+ social network. Separately, regulators in the U.S. and Europe have approved Google's pending purchase of Motorola Mobility ($40; MMI). Google still has a solid long-term growth story but no longer qualifies as one of our top picks for 12-month gains. The stock is being dropped from the Buy List but remains a Long-Term Buy.

Top 15 Utility Portfolio changes

Plains All American Pipeline ($81; PAA), a master limited partnership that operates a network of oil and gas pipelines and storage facilities, grew sales 32% and per-share profits 170% over the last 12 months. The consensus projects profits will drop 10% in 2012, but the estimate is trending higher. MLPs trade like stocks, but they do not pay corporate income taxes and must distribute at least 90% of their profits as dividends. Plains All American, which yields 5.1%, is being added to the Top 15 Utilities portfolio and to the Monitored List.


In December, OGE Energy ($52; OGE) raised its dividend 5%, the sixth consecutive annual increase. OGE supplies electricity to 786,000 customers in Oklahoma and Arkansas and also operates Enogex, a pipeline subsidiary that accounted for 43% of OGE's revenue in the nine months ended September. In the December quarter, Enogex paid $200 million for gas-gathering assets, and the pipeline unit plans further expansion in Oklahoma and Texas. OGE is being added to the Top 15 Utilities portfolio.


In the six months ended December, Exelon's ($39; EXC) sales fell 5% while per-share profits declined 13%. The utility generates 81% of its power via nuclear reactors and seems poorly positioned to deal with an era of low natural-gas prices, and by extension cheap non-nuclear power. Exelon is being dropped from the Top 15 Utilities portfolio.


In the wake of Energen's ($50; EGN) disappointing profit guidance in January, the consensus projects its per-share profits will decline 10% this year. The stock's Overall score has dipped to 35. Energen is being dropped from the Top 15 Utilities portfolio.

Earnings roundup

In the January quarter, Agilent Technologies ($44; A) grew earnings per share 15% to $0.69 excluding special items, meeting the consensus. Sales grew 8% to $1.64 billion on flat orders of $1.62 billion. Although the company's April-quarter guidance for sales and profit guidance falls short of the consensus, its fiscal 2012 outlook is in line with expectations. Agilent is a Focus List Buy and a Long-Term Buy.


CF Industries ($178; CF) earned $7.13 per share in the December quarter excluding $0.47 per share in noncash losses on natural-gas derivatives, up from $2.78 in the year-ago quarter and exceeding the consensus by $0.30. Sales grew 39% to $1.72 billion, also topping the consensus. The U.S. Department of Agriculture trimmed its forecast of corn stockpiles by 5%, reflecting higher export demand due to droughts weakening harvests in South America, and projected record high prices for the 2011-2012 marketing season. CF Industries is a Focus List Buy and a Long-Term Buy.


Comcast ($27; CMCSa) shares rallied after the cable giant reported December-quarter earnings per share of $0.47, up 34% excluding costs associated with the NBC Universal deal and $0.06 ahead of the consensus. Revenue rose 3% on a pro forma basis. Comcast also hiked its quarterly dividend 44% to $0.1625 per share, payable April 25, and announced plans to spend $3.0 billion on buybacks this year, enough to buy back about 4% of its shares at current prices. Comcast is a Long-Term Buy.

Rank Changes

Jabil Circuit ($25; JBL) is being initiated as a Buy. EMC ($26; EMC) is being added to the Buy List and Long-Term Buy List. Google ($610; GOOG) and Oracle ($28; ORCL) are being dropped from the Buy List but remain Long-Term Buys. The Vanguard Short-Term Investment-Grade ($10.74; VFSTX) fund now accounts for 9.9% of the Buy List and 10.2% of the Long-Term Buy List.


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